Building Wealth

Dennis Friedman

I’VE BEEN READING about how people aren’t saving enough money, and how almost half of all Americans carry a balance on their credit cards. Looking to be more financially prudent? Here are 10 pointers on how to build wealth and gain financial security over your lifetime:

1. Save—for a reason. Saving money is the key to building a substantial portfolio. One secret to being a good saver: Have something worthwhile to save for. It might be homeownership or early financial independence.

Whatever it is, write it down and post it where you can see it every day. That constant reminder will keep you on the right track—and help you get in the habit of saving money.

2. Invest in stocks. This is another crucial component of building wealth. My advice: Buy broad-based U.S. and international stock index funds. You’ll capture the stock market’s results at low cost, and that’s proven to be a winning strategy over the long haul.

3. Attend an affordable college. Education debt is a problem for many young Americans. You need to find a quality college that won’t leave you in too big a financial hole. According to research from the College Board, it takes an average 12 years to recoup the cost of a bachelor’s degree.

In other words, by then, you typically have earned enough to recover the cost of the college degree, plus the lost income from the time you were out of the workforce while studying. Use that 12 years as a guideline in choosing a college. Will it take you far longer to recoup your costs? You may want to find a less expensive college.

4. Invest early. Take advantage of compounding by investing as much as possible at a young age. If you do this, you won’t have to save as much to meet your financial goals.

What about the need to build up an emergency fund that’ll cover six months of living expenses? You might fund a Roth IRA—and have it do double duty, both acting as an emergency fund and starting you on long-term investing. You can withdraw your contributions from a Roth at any time for any reason, with no taxes or penalties owed, provided you don’t touch the account’s investment earnings.

5. Automate your investing. Take advantage of the tax-favored savings programs available to you, such as an IRA, Roth IRA and 401(k). Put your savings on autopilot by having your contributions deducted directly from your paycheck or bank account. This is a painless and efficient way to build wealth.

6. Manage your debt load. Many people in their 30s will face critical lifestyle choices that can affect their ability to save money. You might be contemplating buying your first home or purchasing a luxury car. The associated expenses can last for years and even decades.

You need to make sure you can afford these lifestyle decisions. Make sure your total monthly debt payments are 36% or less of your total gross monthly income. Remember, people who are successful in building wealth live well below their means.

7. Don’t look at your portfolio. With any luck, by your 40s, you’re starting to accumulate some serious money. Try not to check your investment performance too frequently. Many investors end up trailing the market because they make too many emotional changes to their portfolio.

8. Play catch-up. Once you turn age 50, the IRS allows you to make additional contributions to your retirement accounts. You can invest an extra $6,000 each year in your 401(k) plan, for a total of $25,000 in 2019. You can also contribute an additional $1,000 a year to your IRA, for a total of $7,000. This is an excellent way to increase your savings rate.

9. Trim taxes. In your 60s, you need to take a closer look at how taxes will affect your retirement income—and especially withdrawals from IRAs and other tax-favored accounts. If you’re in a low tax bracket, this may be the time to convert part of your traditional retirement accounts to a Roth, thereby reducing the taxes you owe once you start required minimum distributions at age 70½ .

10. Delay Social Security. If you’re in good health and can afford to wait, you should defer Social Security until age 70. For instance, if your full Social Security retirement age is 66 and you delay getting your monthly benefit until age 70, it’ll be 32% larger. A bigger Social Security benefit is the best inflation-adjusted annuity you can buy. It would also help protect you in your later years, when you might be running through your other money.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Not My PriorityPower of Two and California Dreamin’. Follow Dennis on Twitter @DMFrie.

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David J. Kupstas
David J. Kupstas
2 years ago

Number one is interesting, save for a reason. I suppose it’s too much to ask to just live simply and spend on what you need, saving the rest. My dad (who was a teenager in the depression) would say, “If you need it, buy it. If you don’t need it, don’t buy it.” I admit that’s a tad harsh. We had seven people in our family growing up and only one income. But people should be able to start with a mentality like that and then ease into discretionary spending, rather than spending everything above the “pay yourself first” savings level. I suspect I would not be popular as a financial planner.

Mik Barbasol
Mik Barbasol
2 years ago

11. Don’t live in a blue state…tax and spend.

David Powell
David Powell
2 years ago
Reply to  Mik Barbasol

This might be more “humbly” framed as “Choose states with a lower tax load if you’re able”. My socially very “blue” state is actually middle of the pack fiscally in terms of state tax policy, according to the non-partisan Tax Foundation. Tax Foundation’s web site is really handy:

David Powell
David Powell
2 years ago

Nice piece, Dennis. With greater longevity, and fewer active workers per retiree, something may have to give to make #10 work well for my age cohort.

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